Speaker 1: Oh why. That was one of the worst days in
Speaker 1: my professional career in terms of watching the behavior in exchange.
Speaker 1: We have a meaningful position nickel at all. I'm not
Speaker 1: sure we traded a single contract that day. I just
Speaker 1: I don't know. It wasn't material the wats, but to
Speaker 1: see an exchange close and then cancel hours worth of
Speaker 1: activity was just utterly, just incomprehensively wrong. I'm France Lackwell
Speaker 1: in the London studio, and I'm David Merritt, also in
Speaker 1: the London studio. This is in the City, Bloomberg's podcast,
Speaker 1: connecting you to the stories the heart of the City
Speaker 1: of London, and this week, Dave, we revisit the nickel
Speaker 1: squeeze back in March that threatened London's place at the
Speaker 1: heart of the medal's trade. Now, for centuries, the London
Speaker 1: Metal Exchange has been the home of global benchmark prices
Speaker 1: for the world's key industrial medals. Right, but those chaotic
Speaker 1: eighteen minutes back in March that sent nickel prices soaring
Speaker 1: they have put the me's status as a key City
Speaker 1: of London institution in doubt. There are now questions being
Speaker 1: raised about its structure, its ownership, and in fact it's future.
Speaker 1: There are lawsuits piling up and market experts forecasting a
Speaker 1: mass exodus of ELAM members down the road. So joining
Speaker 1: us in the studio today is Bloomberg's Jack Farci, who
Speaker 1: covers energy and commodities. Hi Jack, Hello, So Jack, are
Speaker 1: you able to give us, first of all a rough
Speaker 1: history lesson right, so help us understand how it started.
Speaker 1: It's one of the biggest exchanges in the world, certainly
Speaker 1: when it comes to metals. The history of the London
Speaker 1: Metal Exchange dates back to maybe the early nineteenth century
Speaker 1: when they used to gather in coffee shops around here
Speaker 1: in the city of London. They draw a circle in
Speaker 1: the floor and sawdust and then they'd all gather around
Speaker 1: the circle and start trading metals with one another. That
Speaker 1: became more formalized in eight seventy seven when the London
Speaker 1: Metal Exchange was established. It's still with us today, even
Speaker 1: though the UK is around error in the global manufacturing
Speaker 1: economy now, but the London Metal Exchange is still where
Speaker 1: the world prices. And that was what I was going
Speaker 1: to ask you that you know, we're no longer that
Speaker 1: important industrial nation, So why does London continue to set
Speaker 1: global prices for metals. London is is still a key
Speaker 1: financial hub for the world and then the other parties history,
Speaker 1: you know, I mean, there are lots of people who
Speaker 1: would love to establish metals exchanges to be the benchmark
Speaker 1: place for metals to be traded, But everyone's contracts have
Speaker 1: enemy prices in them, and that's very, very hard to
Speaker 1: change as long as you know, people are broadly happy
Speaker 1: to continue using the system that they know, which is
Speaker 1: the Enemy's pretty hard to rip up hundreds of years
Speaker 1: of tradition and history and contracts, many of them that
Speaker 1: last fifty and twenty years, and suddenly switched it all
Speaker 1: over to a new way of pricing metals. Like some
Speaker 1: of the history around it, I mean, it's pretty some
Speaker 1: of the rules actually are pretty archaic. I think you
Speaker 1: could drink in the pit until until three years ago.
Speaker 1: Four years ago, well, the enemy only formally banned traders
Speaker 1: from drinking during the working day. Yes, I mean, it's
Speaker 1: it's one of the things that they weren't drinking, or
Speaker 1: was it. I mean, well, I think it's possible that
Speaker 1: people might have gone out to lunch and had a
Speaker 1: few drinks and come back and traded in some cases,
Speaker 1: probably not In most cases. Well, I know from from
Speaker 1: some of the old timers that it used to be
Speaker 1: the case that everyone would smoke in the ring and
Speaker 1: there was an enormous ash tray in the middle of
Speaker 1: the ring. That they'd all flick their butts into this
Speaker 1: ash tray in the middle while shouting and making hand
Speaker 1: signals and trading copper and tin. And I mean, that's
Speaker 1: the thing, is that the image of the ring is
Speaker 1: is so iconic, isn't it. There a crowd of shouting traders,
Speaker 1: token incomprehensible, really um, and you just say maybe with
Speaker 1: a cigy on as well. At the red seats or
Speaker 1: green seats, red seats, red, red leather, a red leather bench,
Speaker 1: which and so one of the arcake rules, which is
Speaker 1: which they exist, you're not allowed to stand up. You've
Speaker 1: got to keep not one foot grounded to the bench
Speaker 1: at all times. And if you don't get fine, And
Speaker 1: obviously they shut down the ring throughout COVID obviously standing
Speaker 1: around and shouting each other not particularly COVID secure. But
Speaker 1: now it's back, isn't it. And there's been a debate
Speaker 1: about whether you even need this physical ring. But what's
Speaker 1: so good about it. Why the traders still like to
Speaker 1: use that as a way of transacting. Part of it
Speaker 1: is because of the three month contract though instead of
Speaker 1: having each month having a contract, the Eleemy has each
Speaker 1: day has a contract, and then the benchmark price this
Speaker 1: three month changes every single day. So today it's the
Speaker 1: contract for three months time, but tomorrow it will be
Speaker 1: one day later. And that creates this huge matrix of
Speaker 1: contracts that are quite complicated, and all the banks and
Speaker 1: brokers are always trading positions in between these different contracts.
Speaker 1: They argue that's pretty hard to achieve on a computer screen,
Speaker 1: and it's best done in the ring. Not everyone agrees,
Speaker 1: by by any means, but this is a debate that
Speaker 1: has been going on in the Eleemy for longer than
Speaker 1: I've been covering it. Certainly, there's always one camp that says,
Speaker 1: let's get rid of the Ring, and one camp that says, no,
Speaker 1: it's necessary. And so far the argument has been made
Speaker 1: and the Leemy has been listening to it, that is
Speaker 1: that that the ring works and people like it, and
Speaker 1: so it's it's still with us, how's it possible? And
Speaker 1: they've had actually, you know, certain I guess events that
Speaker 1: threatened the stages through the years, but there's not a
Speaker 1: real viable rival to the ELEEMY. Well, the biggest rival
Speaker 1: is the CME formerly comes in in the US Chicago. Yeah,
Speaker 1: but they only have really a copper contract. So that's
Speaker 1: a big rival for the ELEEMY and copper, but it's
Speaker 1: a pretty North American US focused contract. They're certainly trying
Speaker 1: to bring new contracts. They've got an aluminium contract now
Speaker 1: that's global, but it's you know, a rounding era compared
Speaker 1: to the enemy's aluminium contract. And the other big rival
Speaker 1: is the Shanghai Future Exchange, which does a lot of
Speaker 1: volume in metals and is one of the big trades.
Speaker 1: Is people arbitraging between the price in Shanghai and the
Speaker 1: price and the LEEMY. But that's on shore in China
Speaker 1: and so it's not accessible to all global traders and
Speaker 1: that's a real barrier to it becoming the global benchmark contract.
Speaker 1: I think. So it brings us back to those famous
Speaker 1: eighteen minutes in March where Nickel went crazy. That's been
Speaker 1: a huge story today to watching the l M actually
Speaker 1: stopped trading for for Nickel as its skyrocket over the
Speaker 1: course of two days. I mean, that's unbelievable. Had that
Speaker 1: massive surge in nickel prices that prompted halt and trading
Speaker 1: on the ELM. I've covered nickel now for seven years.
Speaker 1: I've just never seen anything like this. You had at
Speaker 1: one point nicol rise by just today. You know, we
Speaker 1: had a price that was in the range of ten
Speaker 1: to twenty thousand dollars for a decade, and then suddenly,
Speaker 1: in the space of one and a half days, it
Speaker 1: went from just over a hundred thousand dollars. That's not
Speaker 1: something in anyone's model, and it's and and and it
Speaker 1: more or less broke the market. We had a situation
Speaker 1: where the biggest company in the global nickel industry, company
Speaker 1: called Singshan, also the biggest stainless steel makers, stainless steel
Speaker 1: being one of the main uses for nickel, along with
Speaker 1: batteries for electric vehicles. They had built up this big
Speaker 1: short position in ellemy nickel. Essentially, they'd sold futures contracts
Speaker 1: betting that prices would go down. They've done that over
Speaker 1: the end of beginning twenty two, thinking that there's going
Speaker 1: to be lots of production coming from Indonesia and that
Speaker 1: would push prices down. Instead, car companies battery companies were
Speaker 1: getting excited about the electric vehicle revolution, buying lots of nickel,
Speaker 1: and and the world was worrying about Russia, and particularly
Speaker 1: after Russia invaded Ukraine, there were lots of concerns that Russia,
Speaker 1: that nickel coming out of Russia might be and commodities
Speaker 1: in general coming out of Russia, but particularly nickel would
Speaker 1: be disrupted. So Nuel's Nickel, Russia's big mining company, is
Speaker 1: one of the biggest nickel producers in the world, and
Speaker 1: crucially a really big supply of nickel metal, which is
Speaker 1: the type that you can deliver on the enemy. And
Speaker 1: so the price of nickel was picking up. At some
Speaker 1: point on March seventh Monday, sing Shan stopped being able
Speaker 1: to pay its margin to its brokers. So you know,
Speaker 1: if you have a short position you've been against the
Speaker 1: price and prices go up, your broker at some point
Speaker 1: gives you a call and says, hey, if you want
Speaker 1: to keep this position, you need to give us some
Speaker 1: more money. At some point, sink Shan stopped being able
Speaker 1: to find the more money. At that point things went
Speaker 1: a bit crazy. The price on that day, March the
Speaker 1: seventh Monday, went from about thirty thousand dollars to about
Speaker 1: fifty tho dollars a ton. Until that point, Nichol had
Speaker 1: traded for ten years in a range of ten twenty
Speaker 1: dollars a ton. And then the market reopened overnight on
Speaker 1: March the eighth, and prices really went crazy. So in
Speaker 1: this eighteen minute period around six am on March the eighth,
Speaker 1: prices went from just about fifty thous dollars all the
Speaker 1: way up to a hundred and one thousand dollars. You mean,
Speaker 1: how long have you been covering medals? Have you ever
Speaker 1: seen over a decade? No, nothing like it. I don't
Speaker 1: think I've seen anything like it in any commodity market.
Speaker 1: To be honest with you, it was the enemy's auctions
Speaker 1: after that huge spike, wasn't it that have really caused
Speaker 1: the biggest concern. The price hit this record high of
Speaker 1: a hundred and one thousand dollars, then came down to
Speaker 1: about eighty thousand dollars at that point that this is
Speaker 1: now about eight fifteen in the morning on March the eighth.
Speaker 1: The Eleemy suspended trading and then crucially they canceled all
Speaker 1: the trades that had happened on that day on mark
Speaker 1: the eighth, about four billion of them re estimate and
Speaker 1: so took the price back to where it had closed
Speaker 1: the previous day, which is forty eight thousand dollars. The
Speaker 1: effects of that was to say to all those people
Speaker 1: who had short positions, which was you know, sing Shan
Speaker 1: was the main one, and as a result sing Chan's
Speaker 1: banks and brokers, but also lots of other companies involved
Speaker 1: in the in the world of nickel trading, that you
Speaker 1: wouldn't need to make your margin calls on the basis
Speaker 1: of eighty thousand or hundred thousand dollar nickel, but you
Speaker 1: could do it on the basis of forty eight thousand
Speaker 1: dollar nickel. So it was a big bailout essentially for
Speaker 1: anyone who had a short position, and consequently anyone who
Speaker 1: had a long position was was pretty cross. Traders were
Speaker 1: mental really because they could have made money, right and
Speaker 1: they put a position to make money and then effectively
Speaker 1: the element canceled it. Yeah, I mean there's been this
Speaker 1: huge backlash, particularly I think from the kind of US
Speaker 1: fund world. Some of them, I don't haven't even lost
Speaker 1: a huge amount of money here, So I mean there
Speaker 1: are lots of ways you could lose money, right, You
Speaker 1: could have had a long position, been betting on nickel
Speaker 1: price going up. You thought it was a hundred thousand
Speaker 1: as maybe you sold some contracts on a hundred thousand
Speaker 1: dollars and then the Eleemy tore up that sale, or
Speaker 1: maybe you were arbitraging between two different prices, you know,
Speaker 1: you had a trade going short nickel and long zinc
Speaker 1: or something, and then the nickel price got torn up.
Speaker 1: Was crazy. Actually in all of it was that the
Speaker 1: Chinese nickel Taykoon, who was effectively almost bailed out, kept
Speaker 1: on saying no, no no, I'm holding onto their short position, right, yeah, yeah,
Speaker 1: I mean that has been the great, the great story,
Speaker 1: and the thing that has infuriated some of these hedge
Speaker 1: funds watching on from the sidelines is that, I mean,
Speaker 1: the Eleemy says that they intervened in the market not
Speaker 1: to bail out Singh Shan and its owners Shanganga, but
Speaker 1: to bail out everyone else in the market who was
Speaker 1: at risk of going including in particular, you know, some
Speaker 1: of the smaller brokers who had clients who weren't paying
Speaker 1: their margin and who would have gone bust if the
Speaker 1: price had been eight thousand or a hundred thousand dollars,
Speaker 1: and certainly if it had been higher. But this drama
Speaker 1: that played out was in effect the enemy bailed out
Speaker 1: Singshan and Shangwanda and and all of its banks led
Speaker 1: by JP Morgan, but also a standard chart at BNP Pariba.
Speaker 1: And and meanwhile, he has got out of it essentially.
Speaker 1: So over the past three or four months, he's largely
Speaker 1: got out of his short position at prices much lower
Speaker 1: than the fifty where the market was stopped, and certainly
Speaker 1: much lower than the eight or a hundred thousand where
Speaker 1: the market went to before the trades were canceled, making
Speaker 1: a little loss but not a very significant loss. Meanwhile,
Speaker 1: you know, the likes of Elliott are saying that they've
Speaker 1: lost half a billion dollars on because of the enemy's actions.
Speaker 1: I remember actually speaking to a hedge fund at the time,
Speaker 1: and we didn't put him on air because he was
Speaker 1: I mean, there are a lot of exploits, There are
Speaker 1: a lot of expletives that cannot be repeated on the podcast,
Speaker 1: so real anger. Right. You had a great interview fund
Speaker 1: seen with Ken Griffin where he said this was one
Speaker 1: of the worst things he'd ever seen in his career.
Speaker 1: You cannot do that in a market that is integrated
Speaker 1: with other markets. You know, what have you traded in
Speaker 1: the exchange that had a back back over the counter
Speaker 1: kind of tract. What if you were a producer selling
Speaker 1: your production forward and all of a sudden you find
Speaker 1: that you didn't hedge. I mean, there's all kinds of
Speaker 1: adverse consequences that come from exchange. Is changing the rules
Speaker 1: of the road after the fat Yeah, because it puts
Speaker 1: in question actually what they'll do next time around. There
Speaker 1: was a great an article published by a fund called
Speaker 1: trans Trend, which is one of the big algorithmic funds
Speaker 1: trading metals, and they said this was effectively the enemy
Speaker 1: seems to have manipulated the market price down and the
Speaker 1: moment we realized what was happening, we felt we could
Speaker 1: no longer entrust the enemy with our client's money. That's
Speaker 1: how a lot of funds saw it, and that's why
Speaker 1: it's such a big deal for the enemy. And now
Speaker 1: we're seeing lawsuits as well. Right, so we've had Elliott,
Speaker 1: you know, one of the biggest hedge funds in the world,
Speaker 1: Paul Singers, Elliot Investment Management is seeking four and fifty
Speaker 1: six million dollars in damages from the l follows and
Speaker 1: also Jane Street, a big arbitrage have filed lawsuits or
Speaker 1: have filed this this thing called judicial review, challenging the
Speaker 1: leemy's actions and and seeking about half a billion dollars
Speaker 1: from them. At the time, Jack, we actually thought that
Speaker 1: the chief executive would go of the eleemy, and we
Speaker 1: probably thought that a lot of the contracts were a
Speaker 1: lot of the money making would move elsewhere. It hasn't
Speaker 1: really well. The amount of trading on the enemy has
Speaker 1: come down in nickel very significantly, so the nickel volumes
Speaker 1: are down about a third since since all this blew up.
Speaker 1: Open interest is also at the lowest in about ten years,
Speaker 1: so the nickel contract is definitely wounded. The rest of
Speaker 1: the eleemy has also seen a reduction, but not as
Speaker 1: not a very dramatic reduction in volume and open interest.
Speaker 1: I think the key issue is the one that I
Speaker 1: said right at the beginning of this conversation. There aren't
Speaker 1: very many alternatives. You know, if you want to trade
Speaker 1: a nickel derivatives contract, there's a contracting Shanghai, but if
Speaker 1: you're an international trader, that's not really accessible to you.
Speaker 1: And so what do you do. You know, you can
Speaker 1: have a fixed price. You can you can decide, you know,
Speaker 1: if you're a nickel minor, you can sell it to
Speaker 1: your customer at a fixed price and say, okay, let's
Speaker 1: just call it dollars a tongue. But people don't like
Speaker 1: doing that. They used to having a floating price and
Speaker 1: hedging their risk and so and so. That's what the
Speaker 1: enemy is for. But Jack, that's in the mediate term.
Speaker 1: I mean, are some of these other platforms abroad, be
Speaker 1: at Shanghai or New York or Chicago not building platforms
Speaker 1: to rival the elemy after this? I mean, can you
Speaker 1: just call it a huge mistake? I think they would
Speaker 1: like to. But the reality of building building a contract
Speaker 1: as an exchange that has that critical mass. The key
Speaker 1: things that people care about when they're trading futures contracts
Speaker 1: is liquidity, is the ability to get out of it.
Speaker 1: I mean, yes, absolutely, is whether they trust the exchange
Speaker 1: to honor their contract or not. But if there is
Speaker 1: no alternative that has good liquidity and volume, there's certainly
Speaker 1: lots of people around who would like a new contractor trade,
Speaker 1: but it's not so straightforward to suddenly click your fingers
Speaker 1: and make it happen. And and the boss, the CEO
Speaker 1: of the Eleemy, Matthew Chamberlain, has been there about five years.
Speaker 1: I mean, ultimately has he taken responsibility for all this
Speaker 1: time or but he's still in his job. He has
Speaker 1: and he is. We are absolutely mindful of the impact
Speaker 1: that this had had on so many people, and we
Speaker 1: need to make sure that it doesn't happen again. Um.
Speaker 1: He was due to leave, in fact, he announced his
Speaker 1: departure in January this year before all of this happened.
Speaker 1: He was due to leave at the end of April,
Speaker 1: but instead the eleemy's owners, which is Hong Kong Exchange
Speaker 1: and Clearing, Hong Kong Exchange, asked him to stay on.
Speaker 1: And he's now staying on indefinitely at CEO in order
Speaker 1: to the mess. And in fact, rather than rather than leaving,
Speaker 1: he's actually he's actually renewed his contract and he's staying
Speaker 1: on and he's in he's disputing these these lawsuits against him.
Speaker 1: I think the Hong Kong Exchanges and Clearing have said
Speaker 1: in a state with the enemy, management is of the
Speaker 1: view that the claims are without merit and that the
Speaker 1: enemy is going to contest these vigorously. What chances have
Speaker 1: they got of winning? Well, it's an interesting one. The
Speaker 1: Leemy is a kind of a slightly weird, weird legal
Speaker 1: legal situation where the Eleemy is considered legally as as
Speaker 1: an arm of the UK government because it performs this
Speaker 1: regulatory function over the market. And so the way to
Speaker 1: sue the Leemy, at least that people have done in
Speaker 1: the past and had success in the limited instances where
Speaker 1: that's happened, is this process called judicial review. And really
Speaker 1: that focuses on how the Eleemy took the decisions, not
Speaker 1: really the rights and wrongs of what the decision was,
Speaker 1: but whether they followed the proper process according to their
Speaker 1: procedures when they took the decisions. So we'll see the
Speaker 1: Eleemy says, of course that they did follow the proper process.
Speaker 1: Their rule book allows them to do pretty much whatever
Speaker 1: they like. If the Eleemy considers that the market is
Speaker 1: disorderly or is at risk of becoming disorderly or anything
Speaker 1: like that, they can take whatever actions they think are
Speaker 1: necessary in order to resolve the situation. So we'll see
Speaker 1: what comes out when when if we get to the
Speaker 1: point where we start seeing how the enemy's decision making process,
Speaker 1: you know, in the minut c I of it, the
Speaker 1: meetings of the special committees and boards and the minutes
Speaker 1: of those what went into their decision making process. But
Speaker 1: I think that the assumption has got to be that
Speaker 1: they followed their procedures. Maybe not. You know, Russel took
Speaker 1: them to judicial review in two thousand and fourteen. I
Speaker 1: think and and was initially successful. So it's possible, but
Speaker 1: I think it's a long shot. Is their long lasting
Speaker 1: and irreversible damage to the reputation both of the enemy
Speaker 1: and their prospects, but also for the city of London
Speaker 1: as a whole, Yes, I think there is. I mean,
Speaker 1: I think the short answer is the Eleemy. You know,
Speaker 1: for for for as long as I've been covering it,
Speaker 1: and certainly since it was brought by the Hong Kong Exchange,
Speaker 1: in has been trying to woo these financial investors, particularly
Speaker 1: you know, big US funds, and persuade them to join
Speaker 1: the physical market participants, the likes of Singshan, the big
Speaker 1: mining companies, the traders, the manufacturers in trading on the
Speaker 1: eleemy to boost volumes, to make the eleemy more profitable
Speaker 1: as a as a business that's going to be an
Speaker 1: extremely hard argument to win now that they're also furious
Speaker 1: with the ELEEMY, and it's gonna be very hard to
Speaker 1: persuade them to trust the ELEEMY again with its current
Speaker 1: ownership and its current governance structure. I mean, and you've seen,
Speaker 1: you know, people like the I M F No Less
Speaker 1: have been calling for reform of the eleemy's government structure.
Speaker 1: I think it's a big issue. I don't see an
Speaker 1: easy way out of it. The ELEEMY has put in
Speaker 1: place already a number of reforms to try and prevent
Speaker 1: something like this happening again. But the key question as
Speaker 1: it relates to how the ELEEMY got itself into this
Speaker 1: situation and the lack of trust in the people making
Speaker 1: the decision, which now all of these hedge funds feel,
Speaker 1: that's hard to resolve without without a meaningful change, without
Speaker 1: probably changing the whole government structure and pay possibly the ownership,
Speaker 1: which so far, at least, people haven't been talking about
Speaker 1: Hong Kong Exchanges hasn't been hasn't hasn't suggested that they're
Speaker 1: they're interested or willing to sell Jack. How do you
Speaker 1: tell the professionals with the wannabes London Metal Exchange, London
Speaker 1: Metals Exchange. That's a no no, it's the London Metal Exchange.
Speaker 1: Anyone who pulls it the London Medals Exchange does not
Speaker 1: know the metals markets. Literally, Jack Jack said, if you
Speaker 1: call it metals, I will walk out. Thank you so much,
Speaker 1: Thank you Jack. I'm David Merritt and I'm Francine black One.
Speaker 1: That's it for this week's episode of In the City.
Speaker 1: We will be back next week and in the meantime.
Speaker 1: If you like the show, please rate it and check
Speaker 1: out the Bloomberg UK website for more news and use
Speaker 1: special thanks for our guest Jack Fergie. This episode was
Speaker 1: produced by Summerside and said her say yeh